5 Buckets 4 Shovels a Beach and a Map

~Liquid Assets Bucket

What:

The first bucket is “liquid assets”, which includes your savings accounts, your marketablesecurities (stocks and bonds) and this is where you would deposit your monthly paycheck. For themost part it is assumed that the tax basis of these assets is close to fair market value, and if youwanted to spend some or take “sand” out of this bucket there would not be a large tax cost. It is alsothe bucket where your annual earnings from wages, interest and dividends, family gifts and the like areadded and your annual expenditures for all aspects of your family’s expense are spent.

Timeline/Time Span:

This bucket starts out empty and by developing a long-term savings and investing plan it grows to be a majorportion of your net worth. This is also the bucket where most people empty other buckets into, thus filling it upquicker.

How Bucket is Used:

Cash Flows: The best way to think about this bucket is to consider the various types of funds that will be used to fill it up over time as well as the various types of expenses that will be incurred, emptying the bucket over time. The chart below shows one’s life over a long period of time broken down into five age groups. Obviously everyone will have a different life experience, but for most people the types of funds going into the bucket and the funds going out are somewhat realistic in the time frames shown.

The chart shown on the next page might represent a typical family’s budget for the year by quarter. The reason this is shown is that most people do a poor job of budgeting where their money comes from and where it is spent. While this chart is not intended to work for everyone, it has some very basic principles that should be part of everyone’s plan.

First, it shows that not all income and expenses remain the same every quarter. The totals at the bottom show that in some quarters you have a surplus, and that in other months you have a deficit due to increased spending. You must be disciplined enough to save when there is an excess of cash inflow, so you have reserves when there is a deficit.

Second, it shows that the first money taken out is used to pay for taxes, insurance, education savings, and retirement savings. These types of expenditures should be automatic so you don’t have to think about them. Small amounts paid on a consistent basis will reap great rewards down the road.

Cash Flows: Now that we have addressed the types of cash flow over the course of your lifetime and introduced the concept of an annual budget, the chart on page 24 is an example of the Liquid Asset Bucket being used over a long period of time.

The inflows to the Liquid Asset Bucket are: 1. Annual earnings while you are working 2. Investment earnings 3. Retirement distributions including whole life insurance 4. Major inflows from asset sales or inheritance.

The outflows from the Liquid Asset Bucket are: 1. Income taxes 2. Household expenses (including education and mortgages) 3. Retirement and Insurance spending 4. Major expenditures

The ending balance in the Liquid Asset Bucket, other than a reserve for savings, is your liquid portfolio that can be managed by your investment advisor.